March 5th, 2007
Warning signals tough going for AMD
Advanced Micro Devices is learning that growing up is sometimes hard. The company said today that it has had difficulty reacting to a slowdown in purchases from its PC maker customers during the early part of the first quarter. Thus it has lowered its revenue expectation for the period. AMD had been expecting to report first quarter revenue of between $1.6 billion and $1.7 billion. The company said today that revenue would likely come in below that figure. Although it did not give any additional detail.
AMD CEO Hector Ruiz, whose Morgan Stanley Technology Conference appearance was Webcast, attributed the warning to AMD’s inability to shift product shipments away from its OEM customers to its reseller channel partners, who could absorb those processor supplies, rapidly enough. This appears to mean that PC makers have built up higher internal inventories of AMD chips than they actually needed and have cut purchases of new chips. Ruiz attributed the problem to the chipmaker's rapid increase in sales to PC makers of late. AMD ships more than half of its processors to PC makers versus selling them via resellers, now.
“We took a risk on how we shifted our capacity to serve our customers and unfortunately some of our customers were not able to hit the very aggressive growth rates we had envisioned,” Ruiz said at the conference. “As a result, we will miss the revenue projections we had” for the first quarter.
Is that a veiled reference to AMD's relationship with Dell? Dell's desktop unit shipments fell 18% from a year ago during its fourth fiscal quarter, which ended in January. The PC maker's notebook unit shipments rose by only 2% during the same period. Its server shipments were also up 2%, far lower than in prior quarters. Hewlett-Packard, on the other hand, saw its desktop unit shipments increase 3%, while its notebooks rose a whopping 57% from a year ago during its first fiscal quarter 2007, which ended in January.
Ruiz, who said Dell had only begun to ramp its shipments of AMD-based PCs, positioned the problem as thus far being limited to the first quarter. Although time will tell. Frankly, I had not expected AMD's first-half 2007 results to be very pretty, following its ATI acquisition. Any company that was integrating an acquisition, whose products were not as profitable as its own, while fighting a price war with its main competitor would face difficulty. AMD has also been under pricing pressure from Intel.
Intel, for its part, is in better position. It has a stronger product line, in its Core 2 Duo and dual and quad-core Xeon 5100 and 5300 series, right now than it has had in some time. This has allowed it to counter AMD's advances. Take the server space, which makes a significant contribution to the chipmakers' quarterly financials, as an example. There, Intel was able to win back market share during the forth quarter.
The “pricing environment is very competitive,” Ruiz said. “We expect that to continue.”
What’s AMD got to do now? Get down to work. AMD has the ability to throttle its manufacturing engine to ensure it doesn’t get into an inventory nightmare. Ruiz said it can cut shipments from its partner Chartered Semiconductor and throttle its own Fab 36, which is in the process of being converted to 300MM wafers. This should buy it time to clear away inventory and right problems with demand forecasting, while giving resellers the attention they had been missing. New products will help ease the pain as well. But chips such as AMD’s Barcelona quad-core Opteron aren’t likely to offer a huge boost until the second half of the year. Until then, it's going to be tough going for AMD.
